Capital gains tax is misunderstood

By Jason Yeh 葉家興

The fraud and insider trading case involving former ING Securities Investment and Trust Co vice president Sam Hsieh (謝青良), who used the government’s Labor Insurance Fund and Labor Pension Fund to manipulate share prices, has already entered the judicial process. Before the final details are clarified, it is hard to come to a conclusion on the case.

However, when asking how and why this major fund manager got involved in such a legal mess, the answer is that it is most likely the result of Taiwan’s distorted tax system.

Fund managers generally have annual incomes of several million New Taiwan dollars. Combined with the bonuses they receive, this figure can reach into tens of millions of NT dollars. Salaries are subject to income tax, the highest rate of which is 40 percent.

Many hard-working salaried employees are expected to give the government part of their income in tax — as much as 40 percent if they earn over a certain amount — while gains made on trading stocks are tax exempt and traders do not have to pay a single cent in tax on any income from these transactions.

This means that all kinds of improper economic temptations are created. If even a highly paid fund manager cannot afford to buy property in the city with his own earnings, and has to resort to stock speculation and embezzlement of public funds to buy property to speculate on, property prices in Taipei have clearly become divorced from reality.

Given how complex the Republic of China (ROC) tax code is, it is difficult to believe that there are no taxes on capital gains from stock and property speculation.

The tax system is totally distorted. It does not take a degree in finance or economics to understand how detrimental this is for the fair distribution of economic resources in society, and how much temptation it puts in front of these “celebrity fund managers.” It is blindingly obvious.

It is little surprise, then, that an opinion poll conducted by the Chinese-language China Times showed that 63 percent of respondents supported a capital gains tax on securities transactions, and 71 percent supported levying taxes based on the actual transaction prices of properties.

Inflated property prices are the result of Taiwan’s unfair tax system and the public is angry about this. The wealthy are not paying enough tax, while others have a disproportionately high burden and are unable to get on the property ladder despite working themselves ragged. The public have therefore been calling for the creation of a fairer tax system.

In a democracy, everyone is entitled to their own opinion. If 60 percent or 70 percent of the public support a politician or political issue and less than 30 percent are against them, we can safely say this represents a clear and solid form of public support.

However, even after the government has made all sorts of compromises over the capital gains tax, why is it that we have seen a majority of people say they are against such a tax when so many of them were originally in favor of it?

Those against the idea have ignored the various uncertainties inside and outside of the economy and have linked the poor performance of Taiwan’s stock markets with the soon-to-be-implemented capital gains tax. This has made many individual investors hesitate, giving them the impression that a capital gains tax is a bad idea, with even those who do not own stocks arguing against it. It is this sort of ill-informed and baseless talk that has seen capital gains tax become a universal scapegoat.